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Issues Involved:
1. Legitimacy of the CIT's invocation of Section 263 to set aside the assessment order. 2. Adequacy of the Assessing Officer's (AO) verification and enquiry during the assessment. 3. Impact of the AO's assessment on the revenue and whether it was prejudicial to the interests of the revenue. Issue-wise Detailed Analysis: 1. Legitimacy of the CIT's Invocation of Section 263: The CIT issued a notice under Section 263, pointing out that the AO did not sufficiently scrutinize or verify the fall in income for the period subsequent to 1-7-1998. The CIT argued that the income for the first three months was Rs. 13,05,103, suggesting that the annual income should have been around Rs. 52 lakhs, not Rs. 2,92,869 as shown by the assessee. The CIT concluded that the AO's failure to verify the method of valuation of stock and the books for the subsequent period rendered the assessment order erroneous and prejudicial to the interests of the revenue. However, the Tribunal found that the CIT did not demonstrate how the AO's order was prejudicial to the revenue or erroneous, as the AO had relied on the audited accounts and tax audit report, which included quantitative details and valuation methods. 2. Adequacy of the AO's Verification and Enquiry: The AO noted that the books were verified up to the date of the raid and that the accounts were quantitatively supported. The AO accepted the income returned by the assessee after considering the tax audit report and explanations provided during the hearings. The Tribunal observed that the AO's reliance on the audited accounts and tax audit report, which were part of the record, was sufficient. The CIT's contention that the AO did not verify the books for the subsequent period was found to be incorrect, as the audit report covered the entire financial year. 3. Impact on Revenue and Prejudice: The Tribunal highlighted that the CIT did not provide any material evidence showing that the AO's order caused prejudice to the revenue. The CIT's assumption that the income for the entire year should have been around Rs. 52 lakhs based on the first three months was not substantiated with any concrete evidence. The Tribunal referred to the case of Gabriel India Ltd., where it was held that an order cannot be deemed erroneous merely because it is brief or does not elaborate on the enquiries made. The Tribunal concluded that the CIT's direction for further enquiry was not justified as the AO had already conducted a sufficient enquiry and the accounts were duly audited. Separate Judgments Delivered: The Tribunal's decision was split, with the Accountant Member and Judicial Member having differing views. The Accountant Member held that the CIT was not justified in invoking Section 263, as there was no prejudice to the revenue and the AO had conducted adequate verification. The Judicial Member, however, supported the CIT's action, stating that the AO failed to conduct necessary enquiries. The Third Member, Vice President K.P.T. Thangal, agreed with the Accountant Member, concluding that there was no failure on the part of the AO and the CIT's order was without jurisdiction. Final Decision: By majority view, the Tribunal held that there was no failure on the part of the AO to make proper enquiries, and therefore, the CIT's order under Section 263 was without jurisdiction. The appeal filed by the assessee was allowed.
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